Airlines and travel companies are scrambling to bring British holidaymakers back home after the collapse of the UK's third largest tour operator.

Phil Wyatt, chief executive of XL Leisure Group, said he was "devastated" by the collapse of his company, which was forced to call in the administrators in the early hours of the morning after the failure of last minute talks with financial backers Icelandic investment group Straumur.

Wyatt said XL's management team had "worked night and day" to try to refinance the company. He admitted that the company had approached the Civil Aviation Authority a few weeks ago to warn of its precarious financial position but that it had been taking bookings right up until it folded.

XL's fleet of planes have been grounded, leaving an estimated 85,000 people stranded abroad, while a further 200,000 have made advance bookings with the company, many of whom will lose out.

Speaking at the Hilton Hotel at Gatwick Airport,Wyatt expressed his anger at the fact that he is not allowed to get his planes in the air. "Unfortunately it's been deemed by the authorities - the government, whoever - that that's impossible. I personally don't believe that's the case."

The CAA is working with other airlines and tour operators to organise repatriation flights for package holiday travellers stranded abroad.

It reckons there are 50,000 tour operator customers of XL already on holiday abroad, a further 10,000 overseas who had booked with XL Airways, and 25,000 with other tour operators who shared the XL flights.

Wyatt reckons there are fewer stranded passengers than the CAA estimates but that the organisation faces a massive challenge in getting them back home.

"The CAA, believe me, will have a huge challenge on their hands to re-protect 67,000 people that are overseas now - 67,000 people who could have flown back on XL Airways, that are going to come back on God-knows-what carriers that the CAA find."

"It's going to be the most challenging airlift, I believe, that anyone has undertaken."

Other airlines have already scrambled to help the CAA. BMI was one of the first off the ground with an Airbus A320 sent out of Heathrow at 6.30am to bring stranded passengers back from Minorca.

Ryanair is giving a fully staffed plane to the effort and will bring customers back for free. Easyjet is charging a flat rate of £75 - with one check-in bag - for XL customers stranded at overseas airports. The deal is open for the next seven days to any XL passenger who is not covered by ATOL protection.

XL, which has a three-year sponsorship deal with football club West Ham that is worth £2.5m annually and is only in its first season, ran flights to more than 50 destinations across Europe and Africa and sells through tour operator brands including The Really Great Holiday Company and Aspire Holidays.

Consumer protection

Anyone who booked an inclusive holiday with XL or a charter flight through four of XL's numerous brands - The Really Great Holiday Company, Kosmar Villa Holidays, Freedom Flights or Aspire Holidays - will be covered by ATOL's financial protection scheme.

But anyone who booked direct with XL Airways - whose flight numbers begin XLA - will have to either buy their way on to the CAA's specially organised flights or make their own way home.

Package holidaymakers who booked with XL's Medlife business are also not covered by ATOL and anyone already abroad will not automatically be brought home.

Other airlines are already reporting a massive increase in demand for flights as customers of XL, based in Crawley, West Sussex, try desperately to make alternative arrangements. The cost of a flight from Glasgow to Tenerife, for instance, has more than doubled to between £500 and £800. Prices for flights this evening have risen as high as £1,800.

The websites of both ATOL and the CAA, meanwhile, crashed this morning under the sheer weight of demand from worried XL customers. The helplines organised by the CAA, meanwhile, appeared permanently engaged.

Anyone who booked their flights or a Medlife holiday with any credit card or a Visa debit card will be able to reclaim their money from their card issuer.

Many passengers may also be covered by their travel insurance.

Transport secretary Ruth Kelly said: "The CAA have a wealth of experience in dealing with these sorts of situations and are putting systems in place to get people home, while the government stands ready to provide the CAA with operational assistance should they need it."

The CAA has recommended that anyone expecting to travel with XL should not travel to the airport. But the first indication that anything was wrong for many holidaymakers came as they reached the check-in desks this morning only to discover that their flight had been cancelled.

XL's administrators Kroll said in a statement that its numerous businesses "entered into administration having suffered as a result of volatile fuel prices, the economic downturn, and were unable to obtain further funding".

In a statement, XL's backers Straumur-Burdaras Investment Bank said it "deeply regrets" the collapse of the company and it is owed about €45m (£35.8m) by the business.

"It is not clear at this stage to what extent this may be recovered," the company added.

Barclays, meanwhile, is understood to be owed just under £10m by the business.

Straumur has bought out XL's German and French subsidiaries, whose customers are unaffected by the collapse of the UK operation.

A spokesman for ATOL described XL UK's collapse as "a huge failure" and urged holidaymakers to be patient.

"With XL Airways no longer operating we are having to bring in substitute aircraft to bring people home. We ask people to be patient while we organise that ... bear with us, this is a huge failure. Our priority is the stranded passengers abroad and getting them back to the UK.

"Clearly if people do incur some additional costs, if they are delayed in their return, then they can put a claim in to the CAA under the ATOL scheme."

In a statement, rival travel company TUI - owner of Thomson and First Choice - called on the government to strengthen the protection given to holidaymakers when they book their trips, especially for holidaymakers who book online.

"In the current environment where the price of oil has increased substantially, we are continuously seeing airlines with less than robust business models failing," said Peter Long, chief executive, TUI Travel. "This week alone both Futura and now XL have had to suspend or cease operations. Unfortunately, many people believe that they will be protected when this arises and this is not the case."

"Scheduled airlines, low cost airlines and online intermediaries, unlike tour operators, are not bonded which leaves their customers stranded or unable to get their money back in the event of failure. We at TUI Travel, as the leading European leisure travel company, will help where we can but it is time that the government realised that there needs to be a level playing field for all providers of overseas leisure travel arrangements."